How Does Your Business Structure Affect Your Taxes?

What is the Best Business Structure to pay the Least Taxes?

Different Business Structures have different tax liabilities, so it is very important to choose your structure sensibly. An entrepreneur should know the tax implications of the business structure being finalized. Here is your guide to know how a legal structure can affect your taxes:

1. Sole Proprietorship

As the name suggests, this business entity is owned by a single individual and not recognized as a separate legal entity. It has an informal structure and therefore, the tax model is the same as an individual.

Tax Rate

A Sole proprietorship firm is taxed as same as an individual. Therefore, the rebate is the same as the individual i.e. if the income is not more than INR 5, 00, 000/-, there is 100% tax rebate.

Surcharge

The surcharge is as follows:

Income less than INR 50 lakhs: No surcharge

Income between INR 50 lakhs and INR 1 Core: 10%

Income more than INR 1 Crore: 15%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge

2. LLP or Partnership firm

Both kinds of partnerships; LLP or a simple partnership firm are taxed as separate entities. This tax implication for this business structure is:

Tax Rate

The income is taxed at 30% 

Surcharge

If the income is less than INR 1 Crore: No surcharge

If the income is more than INR 1 Crore: 12% surcharge

Cess

Cess is calculatd at 4% of income tax and surcharge

3. Private Limited Company

It is one of the most popular business structures in India. A company is a separate legal entity from its director and members from the start. The tax model is divided into two types: Foreign and Domestic

Tax Rate

For the domestic companies, the tax rates are as follows

If the annual turnover is not more than INR 250 Crore: 25%.

If the annual turnover is over INR 250 Crore: 30%

For foreign companies, the tax rates are as follows

If the government is the client: 50%.

If there are other sources of income: INR 40%

Surcharge

Domestic companies:

Income not more than INR 1 Crore: No surcharge

Income more than INR 1 Crore, but less than INR 10 Crore: 7%

Income more than INR 1 Crore: 12%

Foreign companies

Income not more than INR 1 Crore: No surcharge

Income more than INR 1 Crore, but less than INR 10 Crore: 2%

Income more than INR 1 Crore: 5%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge

4. Co-operative Society

The objective of the co-operative society is mutual help and welfare. It is a service-oriented business structure.

Tax Rate

Up to Rs 10,000: 10%

Between 10,000- Rs 20,000: 20%

And, above Rs. 30000: 30%

Surcharge

Income Less than Rs. 1 crore- No Surcharge

Income more Rs. 1 crore- 12% Surcharge

Cess

Health and education cess is computed as 4% on income tax and surcharge

The following are tax structures for different business structures in our country usually opted by SMEs. Apart from other considerations such as Market conditions, Research, Customer profile, Tax implication too plays a dominant role in deciding what business structure you want to opt for.